Monday, 5 February 2018

Financial Regulation Matters is a Year Old: Some Updates

Yesterday Financial Regulation Matters was a year old and, coincidentally, a number of stories covered throughout the first year of the blog have had some significant developments over the past few days; so, in today’s post, we will have a whistle-stop tour of these developments and ask how the recent developments may impact upon a number of parties concerned with these impactful business stories.

Samsung Heir Released from Prison

On the 25th August 2017, we assessed the impact of the changing political, legal, and business landscape within South Korea with the massive news that Lee Jae-yong, the heir to the massive Samsung empire, was to be imprisoned for five years on counts of bribery, embezzlement, and perjury amongst a whole host of criminal infractions as part of his attempt to consolidate his, and his company’s position as one of the leading ‘chaebols’. The news today, that Lee’s sentence was reduced to a suspended sentence after just a year in prison, should be of no surprise to anybody concerned with the study, or indeed interest in white-collar crime. A South Korean Appeals court today adjudged that Mr Lee’s involvement in the massive political scandal involving Choi Soon-sil amounted to ‘passive compliance to political power’ and, whilst legal experts have stated that the evidence against Mr Lee was circumstantial at best, he has been released from prison with the proviso that he must remain in South Korea on account of being convicted of a number of other charges last February. It is also being reported that Mr Lee fully intends to appeal against the original guilty verdicts in due course, although popular commentary within the country suggests that the reputational damage that these events have caused to Mr Lee will be difficult, if not impossible to repair.

Nevertheless, how this development affects South Korean business and politics is still to be decided with a number of aspects still to be played out. For example, will Samsung (via Mr Lee) now attempt to repair the reputational damage done to it and other chaebols, or will it simply continue down the same path on the back of what has been particularly lenient punishment? The backlash felt against the political and business structures within the country suggests that Samsung must now embark upon a concerted campaign to distance itself from the murky waters of South Korea’s elite, but doing so is much easier said than done. Additionally, any attempts to do so must be genuine and forward-looking, because the consequences for not doing so i.e. conducting a superficial PR campaign in the wake of Mr Lee’s release, may cause lasting damage to the social fabric within the country, such is the importance of the chaebols to South Korea and its make-up.

The Federal Reserve Takes an Unusual Approach to Regulating Wells Fargo

We have looked at the continuing struggles of the American banking giant Wells Fargo on a number of occasions: firstly with the discussion about its attempts to repair the massive reputational damage suffered from the ‘fake accounts’ scandal that has consumed the Bank’s organisational responsibilities; we then looked at the effects of the news that original predictions for the amount of fake accounts created was conservative, with millions more predicted and confirmed. As the Bank continues to struggle, news today from the Federal Reserve (Fed) is having a massive impact upon the bank’s fortunes, with the Fed prohibiting the bank from growing past its $1.95 trillion in assets. This unusual (and, arguably, sensible [although there are clear counterarguments]) approach has caused massive waves within the banking and financial communities, with Wells Fargo CEO stating that the move will cut the bank’s annual profit by almost $300 million, potentially rising to $400 million; whilst this figure is particularly insignificant in terms of losses for an organisation this large, the fear is that to be regulatory restrained within the current climate could lead to massive losses in light of the growing influence and profitability of the bank’s major competitors. The New York Times discussed today how the aim of the move is to hold the bank’s Board accountable, because the prohibition can only be lifted once the company demonstrates that it has created and implemented new and more effective corporate governance controls. Yet, the obvious response to this move was one of panic, relatively speaking, within the marketplace, with its shares plunging almost 8% on the back of the news, and a number of advisory firms downgrading the viability of investment within Wells Fargo shares. However, there are a number of considerations to be had with respect to the Fed’s ‘cease-and-desist’ order today, with the underlying issue being one of sentiment.

The real question is what is the Fed’s sentiment in appropriating the cease-and-desist order, and will it hold under pressure? This is a potential issue because if the sceptics are right, and the bank starts to lose substantial ground to its competitors because of the order, then what happens if the bank starts to fail? The Fed will then be faced with the prospect of either (a) letting the bank fail because of its poor governance standards and lending real legitimacy to its enforcement actions, or (b) caving under the pressure of a colossal failure and, at once, fundamentally legitimising and confirming the presence of ‘too-big-to-fail’. It is worth noting that the superficial sentiment of the Fed’s actions is a positive one, because it will likely force an organisation that has proven to be inadequate in terms of its internal governance procedures to make radical changes, but if the bank and its board calls the Fed’s bluff, the whole scenario could turn into something rather monumental in an instant.

Job Losses as the Result of Positive Sentiment

Very briefly, just a small word on two stories which are from different sectors but interconnected in one very particular way. Beginning in March, we spoke of Tesco’s plans to merge with the wholesaler Booker, with the two firms singing the praises of the deal on the basis that it would be advantageous to them as firms, and also to customers. As a result, the issue was brought up in front of the competitions regulator, the Competitions and Markets Authority, with the emphasis being on ensuring that there was to be limited damage, if any, upon competition in the marketplace and upon consumer protection. With the merger confirmed and to be completed next month, news today that Charles Wilson, Booker’s CEO would be taking over Tesco’s operations, was adjoined to the announcement that up to 250 jobs would be lost in the head office, which comes immediately on the back of news that a change to managerial structure within the company has put up to 1,700 jobs at risk. These cuts are in opposition to positive financial news from the company, declarations that detail the company’s increased profits and underlying growth; even more, Tesco shareholders are expected to receive a dividend of 2p per share for the first time since 2014-15.

Similarly, Lloyds Bank has been forthright in its pronouncements of positive financial data for the organisation, with the bank being heralded as a beacon within the industry after it removed itself from any ties to Governmental support in the middle of last year. Yet, as we know, for those still seeking recompense for the damage caused by HBoS, Lloyds’ financial results mean very little (in fact, they are particularly enraging), and news today that Bank aims to cut over 1,000 jobs adds to this notion that financial data is positive yes, but often used to mask an underlying approach towards an organisations stakeholders. Despite the assurances that the bank will be aiming to add 450 jobs in other areas soon, this move comes on the back of announcements for the widespread closure of branches across the country, and across brands connected to Lloyds. So, what is the effect of these two stories?

One clear effect is that one can extract from these events, and how they have been reported, that the financial data i.e. what you can ‘sell’ or promote, is all important whilst protecting jobs is far from high on the priorities of these socially important organisations. In the current climate, positivity is worth more than almost anything and, in developing this narrative of strong data trumping almost everything, the positive spin is being systemically cultivated. The obvious thing to say on the back of that is that perhaps this has always been the way, but that does not mean that it is correct. In uncertain times, as these surely are, some sense of job security should be aimed for by these massive employers, but quite often the opposite is true; whilst technological advances are indeed making many of the workforce obsolete, the impact of that within the current climate is significant because the safety-net for those removed from the workforce is being constantly deteriorated – a show of support for employees from Governmental entities would be particularly welcome, but it is unlikely.

** As the blog is a year old, I would like to take this opportunity to sincerely thank everybody for their support over the past year; the readers, followers, supporters, and contributors, are all very much valued by the blog and the aim now for year 2 is for the blog to go from strength to strength with your continued support. If there is something that you would like to comment on for the blog, your contribution would be most welcome!

Keywords: Financial Regulation, Samsung, South Korea, Lloyds, Wells Fargo, Tesco, Federal Reserve, Competition, Business, Law, Politics, @finregmatters.

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